"In the land of the blind, the one-eyed man is king."
-Desiderius Erasmus Roterodamus
I haven’t run more than 2 miles in probably 6 years. I woke up and ran 8 miles at 2:30 am this morning - Because I can.
My grandmother went into hospice late last week. By (unfortunate and too frequent) experience, a familiar emotional and mental rhythm accompanies the time between terminal diagnosis and passing.
The period is profound and is typically characterized by self-reflection and a renewed appreciation for the fleetingness of time and delicacy of life. Born of that life-contemplation is deepened gratitude and vows of change and self-betterment.
Remarkably, however, and, again, by experience, the human tendency towards transience is equally profound. High-entropy life events which, in the moment, carry the impetus for lasting physical/spiritual/psychological transformation rarely result in material personal metamorphosis.
How long until the hum-drummings of daily life scuttle the renewed appreciation for family? How long until double cheeseburgers again replace early AM exercise sessions or social media supplants meditation? How long until the mental “this time is different” edifice implodes under the weight of its own artifice?
If there’s an investment parallel in this existential drudgery, it’s probably the shortness of market memory. “This time is different” and “if everyone is wrong, no one is wrong” are sirenic contrivances of an institutionalized market.
Anyhow, in other Non-Conventional news, we increased the cash position in the Hedgeye Asset Allocation model to >60% ahead of and through the latest bout of global tumult – Because we can.
Back to the Global Macro Grind …
Following last week’s higher post-crisis high in Existing Home Sales, we contextualized the current setup for housing in the following way:
Better than Beta | When Good is Great: Asset investibility is relative and when growth gets scarce, the growth that exists gets bid. Housing’s rate-of-change transition from great to good in 3Q has proved a winner relative to the double decrement - from okay to bad - in global growth and inflation trends. Further, the recent retreat in rates – stemming largely from OUS turmoil – has further supported the relative case for domestic housing leverage over the nearer-term as affordability can tread water in the face of higher prices. Even domestically, with business investment (still) flagging and rising personal savings stymieing an acceleration in domestic consumerism, housing and resi investment sit among a select set of absolute and relative macro performers. Indeed, the shelter component of inflation which represents ~32% of the CPI basket, remains the singular source of strength buttressing the headline and core CPI readings as disinflation/deflation prevail across the preponderance of goods and services prices.
Recall, this perfectly subjective gem of a question from the BLS anchors the CPI report and the Fed’s view of Inflation’s reality:
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
Yesterday, we got the July update on the 9% of the Housing market that is New Home Sales.
- The Data: New Home Sales = +5.4% MoM and +26% YoY!
- The Detail: As can be seen in the Chart of the Day above, July represented a quirky month from a comp perspective. Year-over-year comps begin to steepen considerably in 3Q (July comp =+7% vs June = -12%) but the sequential was easy given last month’s brick of a print and, on an absolute basis, July 2014 represented the lowest level of sales in 2-years.
- The Distillation: In the immediate-term the comp setup for NHS is less favorable while the longer-term mean reversion opportunity in the New Home Market remains both conspicuous and favorable relative to the magnitude of upside available in the existing market (which has already mean reverted back to average levels of activity). Further, in a global environment characterized by price deflation and 0% +/- growth, a deceleration to low-teen’s sales growth may indeed be the Cyclops in a blind Macro land.
We also received the latest update on Home prices via the Case-Shiller and FHFA HPI reports. As we’ve highlighted repeatedly, the trend in HPI is important because it exhibits a strong contemporaneous relationship with housing related equity performance.
- The Data: The Case-Shiller 20-City HPI for June – which represents average price data over the April-June period – showed home prices declining -0.12% MoM while holding flat at +4.9% year-over-year. On an NSA basis, all 20 cities reported sequential increases while, on an SA basis, 10-cities reported declines.
- The Detail: For the 2nd consecutive month, the 20-city series and the National HPI (which covers all U.S. Census divisions ) have shown divergent, 2nd derivative trends. Whereas the 20-city series showed modest deceleration, the National HPI showed modest acceleration. This dynamic stems largely from the index weighting methodology and the fact that index heavyweights New York, San Francisco and Chicago all showed MoM declines and sequential YoY deceleration
- The Distillation: The deceleration in the 20-city series stands in contrast to both the CoreLogic HPI for June and the multi-month trend in the FHFA HPI series which continue to reflect accelerating price growth. As it stands, we remain inclined to side with the CoreLogic/FHFA data as it's more leading and accords with the rising demand, tightening supply dynamic prevailing currently.
So … Domestic Residential Housing … a white knight amidst the legion of Global Macro Gloom. Right?
ITB = -5% on the day yesterday amidst the beta bloodletting (& juiced by TOL earnings)
Is great not good? If you can’t be long the best fundamental data in the USA (& best rate-of-change #’s in all of global macro), what can you be long?
Gundlach now says “Watch Out Below”, Dalio now says the next big policy initiative may be easing, not tightening. Hedgeye has been reiterating the bond bull and global growth-slowing call for ~9-months. The asset allocation and prospective policy implications are largely implicit.
Tops are processes (not points), valuation is not a catalyst and, conveniently, risk managing the immediate term carries the added benefit of appropriately positioning oneself for intermediate-term risks. I explained the practical implementation of our process in an Early Look last month, but it’s worth re-iterating as the signal serves to identify when you should be buying the dips and whether you should be buying or selling into strength:
Fading Beta Redux: When something is at the top end of its immediate-term risk range, you sell some. When it retraces to the bottom end of its risk range, you buy some more – provided that the security holds TRADE support. If it breaches TRADE support to the downside – that’s fine - you are out of the way (or underweight) and can wait for a test and hold of TREND support before buying back the exposure. If the security breaches TREND support, again, you are out of the way for a potentially large gap down to TAIL support.
As it stands, every S&P Sector is currently bearish TRADE & TREND in the @Hedgeye model. Select securities may present compelling short-term long opportunities but, in this setup, attempting to knife-catch beta is not an exercise in fiduciary excellence.
re-think, re-learn, re-work.
After dropping my son off for his first day of kindergarten this morning, I’ll head back over to the hospital. Life – and markets – cycle.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.98-2.13%
Oil (WTI) 38.04-40.99
To notches in Life’s Belt,
Christian B. Drake
U.S. Macro Analyst